The Situationist

Posts Tagged ‘Richard Posner’

Law and Economics Primer

Posted by The Situationist Staff on January 16, 2010

Situationist Contributor Jon Hanson, Kathleen Hanson, and Melissa Hart, have recently posted their outstanding introduction to law and economics (to be published in Dennis Patterson’s forthcoming volume, “Compantion to Philosophy of Law and Legal Theory) on SSRN.  The chapter includes a brief discussion of the emergence of economic behavioralism and situationism, and it is now available to download for free here.  Here’s the abstract.

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This chapter provides an introduction to the history, uses, methods, strengths, and limits of law and economics. It begins by examining the role of positive and normative approaches to law and economics. To examine the positivist thesis – that the law does in fact tend toward efficiency – the chapter discussed and analyzes the famous Hand Formula developed by Judge Learned Hand in United States v. Carroll Towing. As one of the only traditional cases in which a judge arguably made efficiency his explicit goal, the case presents an excellent opportunity to assess whether, even an efficiency-oriented judge will or can identify the efficient result. The chapter reviews the possible liability rules that might have been applied in Carroll Towing, and uses that review to introduce many of the core concepts and methods of law and economics, including game theory. Ultimately, the chapter concludes that, although the Hand Formula may have led to one of the possible efficient results, there is little reason to be confident, and some reason to doubt, that Judge Hand reached the most efficient outcome. The difficulties inherent in selecting the efficient rule through litigation present a significant challenge to the positivist case for legal economics.

The second part of the chapter considers both the normative support for efficiency and the range of challenges to, and refinements of, the normative position that have developed in recent years. The chapter highlights some of the trade-offs inherent in the law and economics approach and concludes that law and economics has, like any legal theory, both costs and benefits.

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Again, you can download the paper for free here.  For a sample of related Situationist posts, see “Tushnet on Teles and The Situation of Ideas – Abstract,” Deep Capture – Part X,” “Behavioral Economics and Policy,” and “Emotional Reactions to Law & Economics – Abstract.”

Posted in Abstracts, Distribution, Legal Theory, Situationist Contributors | Tagged: , , , , , , , , | 2 Comments »

The Problem of Old Fears and New Dangers

Posted by Adam Benforado on October 6, 2009

Credit Card Lock1A few weeks ago, the grandfather of law and economics, Richard Posner, decided to weigh in on President Obama’s proposal for a Consumer Financial Protection Agency (CFPA), which would regulate consumer financial products including mortgages and credit cards.  He bemoaned the idea of a new regulatory body—dismissing it as the misguided vision of a cadre of idealistic behavioral economists.

As he explained, in an op-ed in the Wall Street Journal, “Behavioral economists are right to point to the limitations of human cognition.  But if they have the same cognitive limitations as consumers, should they be designing systems of consumer protection?”

The enemy is a familiar one for Posner and any self-respecting classical liberal: paternalism.

Posner’s concern is that “the agency will steer consumers to those financial products that it thinks best for them, whatever they naïvely think.”

That statement is misleading and problematic for two reasons.

First, the aim of the CFPA is not to force consumers to agree to something they wouldn’t otherwise agree to; the point is to promote real disclosure so that consumers can make informed decisions.  Thus, the impetus behind the plan for pre-approved “plain vanilla” financial product forms, for example, is not a desire to constrain choice, but to ensure a format that customers can understand.  Without understanding there is no free choice.

Second, even if we accept Posner’s inaccurate and unfair characterization of the agency as paternalistic, that must certainly be better than the status quo that Posner tacitly supports in which companies steer consumers to those financial products they think best for the company, whatever consumers naïvely think.  For someone committed to preserving the autonomy of the individual to pursue his own conception of the good, the world Posner affirms is a coercive nightmare far worse than his caricature of America’s future under the CFPA Act: at least in the latter case, the implicated entity is attempting to pursue the best interests of the American public, not its own.

What is to explain Posner’s inability to see that under the current system individuals lack free choice?  After all he is a very smart guy and the evidence on how mortgage and credit card products are deliberately created and marketed to compel consumers to step into higher cost products is overwhelming.

Why is Posner so ready to see the government as the totalitarian bogeyman and so unwilling to see the consumer financial products industry in this role?

It is hard to say, but I expect part of it grows out of being stuck in a mid-20th-Century mindset.

Richard Posner, born in 1939, came of age during the Cold War.  (Interesting aside: a thirteen-year-old Posner agreed to give his electric train set to the Rosenberg children when they visited his house shortly after their parents were executed.)  During that time, the enemy was the totalitarian state—the overbearing government that thought it knew what was best for the people.  Corporations, by contrast, were the good guys.  They listened to our wants and responded to our desires.  They helped keep us free and happy.

Today, rather than looking objectively at what presents the greatest danger to liberty; he is stuck looking for the nefarious influence of big government.  And that’s where he has gone wrong.

The CFPA isn’t a big government command-and-control-style creation.  It is minimalist, reflecting the ideas of a younger generation of law professors and economists—including Posner’s colleagues, Cass Sunstein and Richard Thaler—dedicated, like Posner, to an environment of free choice, but aware that the government must sometimes act to ensure that such freedom exists.  It is hard to see how an agency that requires credit card companies to not print their U.S. contracts in Arabic or incomprehensible legalese is a real threat to liberty; it seems like a sensible way to make sure that consumers can accurately compare products and that markets work efficiently.

And it is not clear that the CFPA’s oversight would actually hurt the profitability of companies.  Sure, entities that have survived the last few years on trickery and outright deceit would struggle in the new climate of openness, clarity, and disclosure, but what about all of those honest consumer financial businesses that were kept out of the market because they were undercut by sharp practices?

Posner needs to get with the times or get out of the way.  His refrain, “too much, too soon, too costly,” is a tired old mantra that ignores the dangers, abuses, and costs hidden in the status quo.

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Some of the themes touched on in this post are developed in much greater detail in several  law review articles by Situationist Contributors, including the following two (which can be downloaded for free at the given links): “Naive Cynicism: Maintaining False Perceptions in Policy Debates,” “Legal Academic Backlash: The Response of Legal Theorists to Situationist Insights,”

For a sample of related Situationist posts, see “The Situation of Credit Card Regulation,” “Naïve Cynicism in Election 2008: Dispositionism v. Situationism?,” The Financial Squeeze: Bad Choices or Bad Situations?” “The Situation of the American Middle Class,” “Are Debtors Rational Actors or Situational Characters?,” and “The Situation of College Debt” – Part I, Part II, Part III, and Part IV.

Posted in Behavioral Economics, Choice Myth, Marketing, Public Policy, Situationist Contributors | Tagged: , , , | 2 Comments »

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